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Throw Tomatoes At Me If You Must - FHA and Subprime

Go ahead! Throw tomatoes at me if you must. FHA is a subprime type program.

Recently I read "Subprime home loans are back - Las Vegas mortgage borrowers go FHA"*. Just so happens this favorite blogger of mine, Esko Kiuru, is from Las Vegas.

However I'm adding FHA never left the subprime type market. It just became less popular starting in the late 90's.

You see, before subprime as it's labeled today gained popularity, FHA was the program of choice for subprime type borrowers. That is, consumers with little cash and less than perfect credit.

Personally I'm not a big fan of government programs intended to fix business. But I can't argue a fact. FHA is the most successful government program of all time. The reason is because FHA is a program funded by consumers and FHA's insurance fund is there to cover losses.

Now take a step back for just a moment and let's consider why the subprime industry created such a debacle. It was NOT the fault of loan programs. It was NOT the fault of homeowners. It was NOT the fault of mortgage brokers.

I resent the superiority-complex and finger pointing of the agencies, Fannie and her siblings, at the onset of the debacle as if it were the products, homeowners and mortgage brokers that caused the fall. Homeowners, mortgage brokers and loan products were only the scapegoat.

Had banks been required to maintain higher loan reserves, similar to the FHA insurance fund, they would have been able to ride out storms. Yet in some instances, banks were lending 20 times more than they had in reserves.

Excessive leveraging by banks brought the real estate market to its knees. Talk about living beyond your means.

Now back to today, FHA is again the program of choice for subprime type borrowers but FHA insurance funds have been reported lately as running low. Were any lessons learned?

Will there be enough funds to cover future losses or will the tax payer again be on the hook?

If so, who is the next scapegoat?

Discover why Fannie, Freddie and FHA began raising their skirt hems at Mini Skirts And Hope For Homeowners - Part One

Continue here to discover how a game of musical chairs affected mortgage affordability at Mini Skirts And Mortgage Affordability - Part Two

The intriguing saga of Joe The Homeowner preventing another mortgage debacle concludes at Mini Skirts And Affording A Mortgage - Part Three

*Here's Esko's post: Subprime home loans are back - Las Vegas mortgage borrowers go FHA

Posted by Kate Ford Mortgage Translator on 10/31/2009 11:27 AM

Comments (56)

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56 Comments on Throw Tomatoes At Me If You Must - FHA and Subprime

OCT

That sounds like a reasonable summary of the mortgage market woes.

I had my buyers mortgage broker recently telling me that a CALSTRS loan, special loan for teachers in California, was a conventional loan. They put 3% down and get an 80% first and 17% second. The latter they don't have to make payments on for 5 years. Wouldn't you classify this as a subprime loan?

Yep, Jane, especially now that the press has the audacity to call the Alt A's subprime. Alt A borrowers dating back to the mid 90's had the highest caliber of credit. They were originally designed for excellent borrowers with large down payments but exceptional circumstances. Oh My Gosh! I even think some of them could not verify their income. Well that's it, the Alt A borrowers and mortgage brokers originating those products must have collapsed the market. :) :)

Gotta go, a one year old ladybug and a six year old ghost who both call me Grandma are soon to arrive. Kate

Kate - We haven't yet learned the lesson from the most recent housing bubble, and are only working to inflate another.

Kate,

You properly expand on my recent blog about FHA and subprime. Conventional lenders pushed FHA aside years ago with even more attractive subprime programs than what FHA offered. And got burned. And the taxpayer is helping those banks now back on their feet. If the current FHA will need bailout money, as it may, what's the use of a subprime mortgage at all?

Mr Kate,

I hope you have a good Halloween. I know what you are going to say: "Oh gee, Nutsy has captured the real me with his outfit."

Nutsy

NOV

Kate - Great explanation of who did what to whom. (Or is it who?) And it does make you wonder if we are riding the same slippery slope again. Where is the responsibility? Scary.

Kate: Nice thoughts. Thank you! I think FHA is a great program. Not everyone has stellar credit or the money necessary to purchase on a conventional loan. You're right about all the finger pointing-who's next? Have a wonderful weekend!

John, That is the concern or rather should be the concern.

Esko, thanks. What has happened in the current debacle in regards to the tax payer needs to be a lesson learned, not repeated.

Nutsy, I saw a picture of you on your boss' blog depicting the real YOU.

Susan, If FHA insurance funds are kept at a level that can insure losses without falling back on the taxpayer who can't hold up much more, avoiding that slope is promising.

Paul, yes, the FHA program IS great and not the problem!

Mrs Kate,

You are one mean lady but I predict you will become nicer at Thanksgiving, or so Nutsy hopes.

Nutsy

Nutsy, This being your subtle way of showing us the next oddity in the life of a tree rat? But back to Thanksgiving. Yes, on another Blog I was inviting Charles and James to a bbq since the life span of squirrels... Ah never mind - just go read the post for yourself.

Kate,

The problems appeared to start when conservative bankers moved into tyhe high risk venture capital business.

Brian

Brian, leveraging fueled by greed was their downfall wasn't it? Think of retired folks who depended on Fannie's reliability when they invested. After all, wasn't Fannie a quasi-government entity? Almost as good as a T-bill. So we all thought.

NOV

Greed - Borrowing money you don't have, to buy things you don't need, to impress friends you don't like.

Bring me back to the good ole days when people used their heads rather than leverage when making a purchase.

Dan, bring us back to the good ole days when Bankers lived within their means.

Kate, this is a good blog. I remember when FHA was a great loan, the best for people with low income. We sold a ton of them.

I also remember having a customer who was in foreclosure probably 7 or 8 years ago saying that he was "doing a test case" because the banks used his loan to borrow more money.....a ghastly amount that the bank could borrow from the Fed just using his loan as collateral. He may have been partially right because if the leverage was that great, making any kind of loan was advantageous to get more money. He lost the house to foreclosure so definitely the case story was a lie on his part or else he lost the case.

Kate - Great headline - but far from accurate!

FHA and sub prime are miles apart.

Even when manual underwriting and alternative credit were acceptable for FHA loan review the two could not be put into the same basket.

It is true that many borrowers were placed in sub prime loans that could have qualified for an FHA loan. But that was more a problem of greedy loan officers or the loan officer's company's lack of HUD approval that caused that to happen.

FHA = A verifiable credit history, A 620 score, no late payments on any credit obligation in the past 12 months, no default on student loans, no BK or foreclosure in recent history, a stable job with verifiable income that meets the debt ratio qualifications, and money down, to name few are the differences between a sub prime loan and an FHA loan.

A sub prime loan allowed no score, recent (even current) BK, current late payments, recent foreclosures, non-verified income and employment, and no down payment or closing costs.

I do agree with many of the other statements that you made but your underlying premise does not hold water.

Full Service Loan Officer, no matter what you call FHA, if lenders had kept adequate reserves regardless of the type of loans, we may not have experienced the crisis we find ourselves in today. FHA insurance funds are running low. The question still remains. Will there be a repeat of history? And if so, who will be the next scapegoat?

I stand behind what I said. FHA is a subprime TYPE program allowing for reduced down payments and less than perfect credit.

Hey what's up with you and Nutsy? Funny to watch ya scrap. The Full Service Loan Officer has a point but FHA does allow for BK's 2 or more years old (2 years could be considered recent), does allow for lates on credit report in the past 12 months, 3.5% down can be financed via HOC programs or Grants like Prince George's NSP or Frederick's NCIS programs. The banks are coming up with stricter overlays such as higher credit scores and DU (Direct Underwriting) has become a bit stricter in handing out Approved/Eligibles. I would say that FHA used to be a Subprime program but it's evolving to a higher caliber lower risk loan than years past. I love your post, and I think Nutsy is jealous :)

Barbara, Sounds a little fishy, doesn't it? Maybe Charles will add his "Something fishy is going on here" image. :)

But anyway don't you think FHA is still a great product? It has allowed home buying in spite of low down payments, less than perfect credit, and various extenuating circumstances for well over 60 years.

Mario, Credit standards are like the tide. They ebb and flow depending on the markets. With sufficient funds for insuring, FHA should be able to continue furthering the dream of homeownership. That's what we all want!

I agree, Nutsy is jealous, among other things... :)

I agree with the Full Service Loan Officer. Anyone who breathed could get a subprime loan. FHA requires people to actually be able to qualify to be able to afford the home purchase. There really is no comparison.

Bob, if we don't compare the banker's excessive leveraging of subprime as we know it today (and additional products) to FHA insurance funds running low, we are in danger of repeating history. As I already asked, will there be enough funds to cover future losses or will the tax payer again be on the hook?

Kate - I agree completely. I used to cringe when I would hear the talking heads and politicians complaining about "no skin in the game" and the reason we got into this mess was brokers pushing 100% loans. At the time that those loans existed, you could have easily got an FHA mortgage where the seller even gave you the down payment! And this loan would be federally insured! Even when they disallowed the seller DPA, we were still insuring loans at 99.25% LTV. Is that .75% going fix the problem of "no skin in the game". Sorry, I didn't mean to hijack your post, it is just something I am passionate about. I think we are on the verge of something pretty scary. When I see loans being approved with ZERO reserves and borrowers living check to check, I can't think that this will end ugly. Thanks for giving me a boost to my week!

Kevin, Please come hijack my blog any day! Here's to a great week for us all, Kate

Kate,

You're absolutely right! FHA was the "subprime dujour" for years and regained the title lately. Only diff being you had to have a 620, meet certain income to debt ratios and have no lates for the previous 12 months.

I believe FHA gets a bit of an unfair rap as a result of past excesses by the conventional loan market. That being said, I too worry about their insurance reserves going forward. As a taxpayer, I believe I have paid for enough subsidies, i.e. cash for clunkers and the first time homebuyer tax credit. Prices have retreated for two years now and we're entering our prime selling season in a few months. Let the tax credit end and don't stick us for any more rebates! We will recover on our own without this silliness, just like we always have!

Sorry, I got off topic but I had to say it!

You say: "Dan, bring us back to the good ole days when Bankers lived within their means."

What about the Federal Government living within its means. Will that EVER happen?

This is the definition from Wikipedia-

Subprime lending (near-prime, non-prime, or second-chance lending) in finance means making loans that are in the riskiest category of consumer loans and are typically sold in a market from prime loans. The standards for determining risk categories refer to the size of the loan, "traditional" or "nontraditional" structure of the loan, borrower credit rating, ratio of borrower debt to income or assets, ratio of loan to value or collateral, documentation provided on those loans which do not meet Fannie Mae or Freddie Mac underwriting guidelines for prime mortgages (are "non-conforming"). Although there is no single, standard definition, in the United States subprime loans are usually classified as those where the borrower has a FICO score below 640. Subprime lending encompasses a variety of credit types, including mortgages, auto loans, and credit cards. The term was popularized by the media during the "credit crunch" of 2007.

Subprime lending, in theory, could be a conventional loan that FNMA and FHMLC would purchase. However, the definition precludes these loans from the generalization of Subprime lending. However, per the definition, a borrower with a 620 credit score, 5% down payment, higher debt-to-income ratios, and minimal assets would still qualify for a FNMA Conventional loan.

In my opinion, a majority of homeowners with FHA loans are defaulting due to the negative equity in many neighborhoods. Until the market corrects itself, this will be the trend of many, even the most sophisticated consumers. Over the last 3 years, many of the homes were financed with FHA loans as the Subprime market imploded. Coincidentally, that's also when the values of homes began to decline.

I personally agree with your statement, a portion of FHA loans do fall into the subprime category. We did loans for borrowers one year out of Chapter 13 bankruptcy. They sometimes had credit scores in the 500's, in some cases even below 500. Most lenders have overlays that prevent that now. However, not all FHA loans fall into the category of Subprime. Many of our current borrowers have 700+ credit scores, significant reserves (mostly in 401k's) and opt to use an FHA loan to purchase their home. Today's loans are, arguably, have the all-time highest credit grade and ratings.

It will be interesting to see what happens to FHA and HUD over the next few months. Very interesting topic Kate!

One last note, VA loans are the best performing home loan and they allow a borrower to finance the home with zero down payment. Technically, they too would be classified as Subprime.

Blake, Thanks for that! FHA has been so successful in the past. When you think back to its inception in the 1930's, one thing has never changed - its passion to strengthen the US by increasing home ownership. We need FHA to keep the markets fluid right now. That is why it is so important to maintain the reserves. Important for the tax payers too!

Mark, You realize when I'm using the term banker in this context that I am NOT referring to mortgage originators right? Just making sure. Moving on, when will the feds live within their means you ask? Probably not until one of us runs for Pres. and the rest of us here fill the congressional seats.

David, Well, not that I think Wiki is the king of definitions :)... but that is why you will notice that I was careful to say subprime TYPE products. I guess I could have said subprimish. :)

When Freddie released automated UW for FHA, we tested it and there was little it wasn't approving. It was a jaw dropper. But soon afterward subprime products as we know them today were becoming more mainstreamed and sucked up a lot of what could have been FHA borrowers.

Of course there are so many ways to use FHA, even for borrowers with perfect credit and greater than the minimally required down payments. I actually took VA out of the blog because it was getting too long. Glad you brought it up here.

Sometimes when businesses do what they are told exhorted to do, they get burned. Even when the business is an old and prosperous bank.

Of course FHA is subprime and we, that is us, that is you, me and every other taxpayer, is on the hook. And we will never get off, or be let off.

Jay, And that is why it is important for FHA to keep that fund high enough to cover losses. Does Croakster have an FHA loan for his pond?

Interesting point. However, FHA does have minimum standards and rules to follow. That's what helps makes it successful. Unlike the sub-prime of past years.

FHA seemed like a common sense program, demonstrated ability to pay were more important than credit score or credit history. FHA is getting more hard and fast rules, that is not good. I could buy a nice home for less than my rent, but my income does not justify it and I am self employed. This is very frustrating.

We have a saying in the mortgage industry. Subprime never went away it's now called the FHA.

NOV

Too bad no one is listening!

I am far too smart for that!

Very kindly,

Croakster

I like the fact that FHA is funded by those who benefit from it and would like to see more government programs follow a similar model or just don't create the program.

Wayne, yes, I think we'd all agree that guidelines are important to successful lending.

Gene, Lack of payment shock has been used as a compensating factor in the past but not to ignore guidelines.

Mike, Get ready to duck! :)

Jirius, Well... I don't know I would say NO ONE is listening. You are, right?

Croakster, So your pond is free and clear?

Mark, The FHA insurance fund has worked well. At times, even created a surplus.

So, are you also saying that VA loans are sub-prime loans? What's the difference? These are all insured products, so who exactly is taking the loss? The hedge funds that invested in the mortgage backed securities? The insurers? Maybe it's really a question of adjusting 'risk based premiums' for certain loans. Insurance companies usually are quite profitable. If the mortgage insurers aren't making money, they aren't charging enough premiums. It's that simple --- you want a loan and you have poor credit - you get a credit card with 28% interest. You want a home loan? Sure - but you have to pay a 10% insurance premium.

The banks in Europe are smart. They also make you take out a life insurance policy to cover the mortgage and make them the beneficiary.

And the best part of all of this? No government intervention.

Weichert Realtors, I don't connect the dots between a life insurance policy and the bank's excessive leveraging...

The question remains, were any lessons learned by the banks living beyond their means? Will FHA maintain the proper insurance fund levels to insure losses? Or will the tax payer again be on the hook as we are for the failing non-govie mortgage market.

Hi Kate! I had to comment one more time, since I came back to copy and paste my answer into another blog I am writing. I enjoyed reading the comments from different members. I wanted to take just a few minutes and give you my thoughts to the questions you posed above.

The question remains, were any lessons learned by the banks living beyond their means?

I highly doubt it, since history tends to repeat itself.

Will FHA maintain the proper insurance fund levels to insure losses? Or will the tax payer again be on the hook as we are for the failing non-govie mortgage market.

FHA is a division of the U.S. Department of Housing and Urban Development. Here is their mission statement: HUD's mission is to increase homeownership, support community development and increase access to affordable housing free from discrimination. To fulfill this mission, HUD will embrace high standards of ethics, management and accountability and forge new partnerships--particularly with faith-based and community organizations--that leverageresources and improve HUD's ability to be effective on the community level. This means they are "too big to fail". We "the taxpayer" are already on the hook if FHA fails.

They are good comments, aren't they David? each and every one.

My husband looked at yours and I hear him say whoa. :)

But of most importance, David, you are copying your remarks here to take somewhere else??????? Humph.

Lake, stock of fish and barrel full of flies!

Very kindly,

Croakster

Croakster, Great planning. Don't leverage those flies. It would muddy the waters. Kate

Mrs Kate,

When you talk about a post, exactly what do you mean. Posts are for fences, not reading.

Nutsy

Nutsy, learn when to use question marks.

Ms Kate www.posts-r-us.edu

PS Nutsy, I guess you never discovered the photo I posted of you on Halloween.

Oh did I forget to mention bankers? I agree. They were highly leveraged in risky loans that made no sense to me at all.

NOV

Dan, gotcha! Thanks, Kate

Actually it was only a few sentences because they were relevant to a new blog I am writing about $100 Down Payment HUD Homes. :)

daKrusher, Well then, I guess I'll let it pass. You are welcome back anytime. :) I'll watch for your post.

===

Guess I should head Nutsy off at the pass:

Blog: a type of website or to add content to a blog

Post: an entry in a blog

NOV

Great Blog Kate. Thanks for speaking up for those loan brokers. We all need to help solve this mess.

Awareness is the first step, isn't it, Mark?

NOV

Mrs Kate,

Where are you. I am missing your ongoing criticism. What does not kill me makes me stronger. You are making me very strong.

Nutsy

NOV

Nutsy, you are a puny and scrawny squirrel. There is nothing strong about you. However in the spirit of good will, I posted a blog about your bad fur today.

Ms Kate www.alive-and-well-in-las-vegas.gov

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